There is nothing more daunting then using your hard-earned money to invest in the stock market. Due to its unpredictability, you can never truly know which direction the stock price is headed.
In this mini-series, we will examine five different investment vehicles that include stocks, bonds, ETFs, mutual funds, and derivatives.
All about stocks
Stocks represent ownership in a company. When you purchase stocks on the stock market, you are purchasing a part of a company from another investor.
When a company wants to raise money in the public, it can do so by issuing equity or debt. Examples of equity include common shares and preferred stocks, and an example of debt is a bond.
Common shares give investors ownership in the company as well as voting rights on major decisions such as the board of directors. The board of directors are responsible for the hiring, firing, and oversight of the chief executive officer.
Preferred shares usually do not come with voting rights, but it entitles its owners to dividends prior to common share owners. In the event that a company declares bankruptcy, preferred shareholders rank after bondholders but before common shareholders when it comes to payouts.
There are a wide variety of bonds that differ based on maturity, rating, and rank. Bonds can mature from several months to several years. Companies such as Moody’s and S&P are involved in rating a stock, which can range from AAA to C/D with AAA being the highest-quality bond. Bonds are further divided into senior and junior debt. Senior debt has priority over junior debt when it comes to repayment. Junior debt is also referred to as subordinated debt.
When a company issues shares for its first time, it is called an initial public offering (IPO), which is facilitated by an investment bank. Once these shares change hands from financial institutions to investors and are then resold to other investors, the shares then trade on the secondary market. An example of a secondary market is the TSX.
An example
One example of a company that trades on the TSX is Fire & Flower, which is an independent cannabis retailer. I recently wrote an article whereby I was bullish on this company. What is amazing about this company is that it recently graduated from the TSXV to the TSX, which means that it meets the standards of many financial institutions, which gives it access to more funding.
Fire & Flower recently received a $26 million investment from Couche-Tard for 9.9% equity in the company. This is in addition to its cross-Canada footprint, which makes it one of the leading retailers in the cannabis industry. It is also the only company on the TSX that operates retail cannabis stores.
Bottom line
Stocks are a risky investment and should be contemplated carefully before making a purchase. As a long-term investor, I would caution you about speculating on stocks (purchasing without thorough research), as the downside could be massive.
If you’re looking into purchasing stocks, I strongly advise you to research both the industry and the company. A rapidly growing industry may lead to inflated share prices but could also mean significant returns, whereas a more stable industry means more predictable returns.
You want to look for a company with a growing net income and high cash flows from operations. This indicates that it is good at turning profit and its operating activities are sufficient to pay the bills.
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